NCLT held that the security deposit with a profit-sharing arrangement constituted financial debt, thereby justifying the initiation of CIRP under Section 7 of IBC.
The National Company Law Tribunal (NCLT), Kolkata Bench comprising Judicial Member Smt. Bidisha Banerjee and Technical Member Mr. D. Arvind held that the security deposit advanced by the Financial Creditor had the commercial effect of borrowing, as it was disbursed in consideration of the time value of money, which was to be compensated through profit sharing—thus qualifying as a financial debt under Section 7 of the IBC. The Corporate Debtor’s unilateral termination of the agreement without refunding the deposit constituted a default, justifying the initiation of CIRP.
The National Company Law Tribunal (NCLT) heard the application C.P. (IB) / 78 (KB) 2024, filed under Section 7 of the Insolvency and Bankruptcy Code, 2016, by Sumangal Dealmark Pvt. Ltd. and others against Citystar Infrastructures Limited, seeking the initiation of the Corporate Insolvency Resolution Process (CIRP). The Tribunal convened in hybrid mode and heard detailed submissions from the learned Senior Counsel and Counsel representing the parties. The dispute arose from an agreement dated 18th February 2014, under which the Financial Creditor provided financial assistance to the Corporate Debtor for the construction and development of a real estate project. This agreement was distinct from a development agreement executed on 12th February 2007 between Bengal Secretariat Co-operative Land Mortgage Bank and Housing Society Limited (BSCHSL) and the Corporate Debtor, under which the Corporate Debtor was entrusted with the development of the property.
Under Clause 6 of the agreement, the Financial Creditor provided an interest-free security deposit of ₹20 crore, which was to be refunded upon project completion. Clause 9 stipulated an equal profit-sharing mechanism between the parties. The Financial Creditor disbursed ₹13.2 crore under this arrangement, with no dispute from the Corporate Debtor regarding the disbursement. However, the Financial Creditor observed a lack of progress and demanded the return of the deposit along with an 18% market-equivalent interest, ultimately claiming a default amount of ₹78,73,12,958/-. The application was filed in 2024, within the limitation period, based on a default date of 24th December 2022. The Applicant's Counsel relied on the Corporate Debtor's Board Resolution dated 28th January 2014, approving financial assistance for land development, and the agreement’s recitals, confirming the financial nature of the arrangement.
The Tribunal examined the financial assistance, which included contributions from associates of the Financial Creditor: (i) ₹15 lakhs loan from S M Niryat Pvt. Ltd. at 12% interest, evidenced by TDS deductions in the Income Tax portal's 26-A statement; (ii) ₹55 lakhs advanced by S. M. Carriers Pvt. Ltd.; (iii) ₹12.25 crore advanced by Sumangal Dealmark Pvt. Ltd.; and (iv) ₹25 lakhs advanced by Samriddhi Metals Pvt. Ltd. The Tribunal treated the loan from S M Niryat Pvt. Ltd. as a financial debt due to its interest component but classified the amounts from other entities as interest-free security deposits, returnable with a 50% profit share. Nevertheless, the Tribunal determined that these deposits had the commercial effect of borrowing, as they were provided in consideration of the time value of money, to be compensated through profit sharing. Citing the Supreme Court's rulings in Orator Marketing Private Limited v. Samtex Desinz Private Limited, REEDLAW 2021 SC 07562 and Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others, REEDLAW 2019 SC 08502, the Tribunal affirmed that financial debt includes interest-free loans advanced to finance business operations if the consideration involves the time value of money.
The Corporate Debtor unilaterally terminated the agreement on 24th December 2022 without refunding the security deposit, leading to the present application. The Tribunal rejected the Corporate Debtor’s argument that the arrangement constituted a joint development agreement rather than a financial debt. Distinguishing the case from Mukesh N. Desai v. Kiran Mavji Thakkar and Harendra Singh Khokhar v. Indarprashta Buildtech Private Limited and Another, REEDLAW 2024 SC 05549, the Tribunal noted that the Financial Creditor neither held ownership rights nor shared in the project assets but was merely entitled to a refund with profit share. Given that the defaulted amount exceeded the statutory threshold, the Tribunal admitted the application and initiated CIRP against the Corporate Debtor.
Mr. Ratnanko Banerji, Sr. Advocate, Mr. Joy Saha, Sr. Advocate, Mr. Shaunak Mitra, Mr. Sidhartha Sharma, Mr. Rishav Dutt, Mr. Arjun Asthana and Mr. Aman Kataruka, Advocates represented the Petitioner.
Mr. Jishnu Saha, Sr. Advocate, Mr. Reetobroto Mitra, Mr. Rudrajit Sarkar, Ms. Arundhati Burman Roy, Ms. Pushpa Mishra, Ms. Tamongha Saha and Mr. Ishaan Saha, Advocates appeared for the Respondent.
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